FRANKFURT (MNI) – The latest comments of European Central Bank
Executive Board members shortly before the start of the purdah period
suggest that the ECB still favors a rate hike in July.

On Monday, Juergen Stark said the central bank is “very vigilant,”
employing the code word that signals a rate increase is imminent.

The ECB’s refinancing rate of 1.25% “is no longer appropriate,”
Stark added. Upon consideration of all available information, the ECB’s
rate hike of 25 basis points in April “will not be the only one,” he
said.

On Friday, fellow board member Jose Manuel Gonzalez-Paramo observed
that despite the central bank’s first rate move in April, “short-term
interest rates continue to be very accommodative.”

Recent speculation that the ECB could postpone the next rate move
due to rising tensions in Greece thus appear unfounded and the central
bank committed to strictly separating its monetary policy from sovereign
debt troubles in the Eurozone.

On the sovereign debt front, however, the ECB appears increasingly
out of step in its insistence that there is only one route for Greece
and that the country will manage to emerge from the crisis if it sticks
to austerity measures.

“There is only this Plan A. Greece must implement the austerity
program,” Stark said Monday. Should Greece fail to implement spending
cuts and privatization plans, “I do not expect the international
community to finance Greece beyond July,” he said.

However, despite Stark’s insistence that there is only a “plan A,”
European officials are reportedly preparing a plan B, in case the Greek
parliament refuses to pass the new austerity measures

“Be sure, we’re working on it, we’re not only thinking about it,”
an EU official told Agence France Presse. “The next step is not a
default of Greece.” According to other media reports, an EU bridging
loan to Athens is one of the options being discussed.

Some officials, including German Finance Minister Wolfgang
Schaueble, have publicly conceded that they must prepare for the
possibility that Greece might not approve E28 billion in new tax hikes
and spending cuts, as well as a E50 billion plan to privatize state
assets, in Thursday’s parliamentary vote.

Even if the Greek parliament passes the measures, it may only serve
to postpone an inevitable debt restructuring, many economists have long
argued. In an unusual move, given the often cited “fraternity of central
banks”, Bank of England Governor Mervyn King appeared to join the ECB’s
critics.

“Providing liquidity can only be used to buy time,” King said last
week. “Simply the belief, ‘oh we can just lend a bit more’, will never
be an answer to a problem which is essentially one about solvency.” On
Tuesday, he warned that pretending there is only a liquidity issue might
exacerbate the problem.

For now, however, the Eurozone appears to be intent on buying more
time and governments are working with the private sector to devise a
participation for a second bailout that would give “Plan A” a chance to
work should Greece play along.

At a meeting of private banks, held under the auspices of the
Washington, D.C.-based Institute of International Finance in Rome on
Monday, a plan hatched by French banks and the French Treasury was
discussed among other proposals.

The plan would see private creditors agree to reinvest 50% of their
expiring Greek bonds by accepting new paper with maturities of 30 years.
They would invest another 20% of their expiring Greek holdings, as a
guarantee against the new 30-year Greek paper, in zero-coupon bonds that
would have the highest rating and might be guaranteed by the European
Financial Stability Facility — though this is controversial.

In one variation of that plan, favored by some French bankers and
perhaps by some others, the banks would reinvest the proceeds of their
maturing Greek bonds not in new sovereign securities but in syndicated
bank loans granted to the Greek government.

However, it is unlikely that final details of a private sector
involvement will emerge in the near-term. “It’s early days,” a senior
Eurozone source told MNI. “Talks will continue informally over the
summer. I expect things would be finalized by the time of the next
program for Greece, in September.”

“But that itself depends on Greece taking certain measures. So
there’s uncertainty,” he said.

Indeed, in the withering heat of public revolt in Greece,
parliamentary passage of new austerity measures on Wednesday is not yet
secure. A failure to pass the measures would either result in an
immediate default or trigger Plan B.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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